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AOL (NYSE:AOL)

Q3 2013 Earnings Call

November 05, 2013 8:00 am ET

Executives

Eoin Ryan

Timothy M. Armstrong - Chairman and Chief Executive Officer

Karen E. Dykstra - Chief Financial Officer and Executive Vice President

Analysts

Brian J. Pitz - Jefferies LLC, Research Division

Ross Sandler - Deutsche Bank AG, Research Division

Ronald V. Josey - JMP Securities LLC, Research Division

James Cakmak - Telsey Advisory Group LLC

Joyce Tran - BofA Merrill Lynch, Research Division

Eric James Sheridan - UBS Investment Bank, Research Division

Mark S. Mahaney - RBC Capital Markets, LLC, Research Division

John R. Blackledge - Cowen and Company, LLC, Research Division

Debra Schwartz - Goldman Sachs Group Inc., Research Division

Mark May - Citigroup Inc, Research Division

Laura A. Martin - Needham & Company, LLC, Research Division

Peter Stabler - Wells Fargo Securities, LLC, Research Division

Robert Stephen Peck - SunTrust Robinson Humphrey, Inc., Research Division

Operator

Good day, ladies and gentlemen, and welcome to AOL's Third Quarter 2013 Earnings Conference Call. My name is Shequanna, and I will be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to Mr. Eoin Ryan, Senior Vice President of Investor Relations. Please proceed, sir.

Eoin Ryan

Good morning. Thanks, Shequanna and everyone, for joining us for our third quarter 2013 earnings call. You can find our Q3 earnings press release and the accompanying slides and trend schedules on our Investor Relations website.

On the call with me today is our Chairman and CEO, Tim Armstrong; and our Chief Financial Officer, Karen Dykstra. We'll make some brief remarks on the quarter and our overall strategy, and then we will open up the lines for Q&A.

But first, I will remind you that during this call, we may discuss our outlook for future financial and operating performance, corporate strategy, marketing and product plans, technology improvements, cost initiatives, planned investments, as well as our expectations of the economy and online advertising in general. These forward-looking statements typically are preceded by words such as we will, we expect, we believe, we anticipate or similar statements.

These forward-looking statements are subject to risks and uncertainties, and our actual results could differ materially from the views expressed today. Reported results should be -- should not be indicative of future performance. Some of these risks have been set forth in our annual report Form 10-K in the year ended December 31, 2012, filed with the SEC. All information discussed on this call is as of today, November 5, and we do not intend and do not undertake any duty to update this information to reflect future events or circumstances.

We will also discuss certain non-GAAP financial measures, including adjusted OIBDA and free cash flow. I refer you to the press release and Investor Relations section of our website for all comparable GAAP measures and full reconciliations. Finally, from time to time, we post information about AOL on our Investor Relations website at ir.aol.com and our official corporate blog at blog.aol.com.

And with that, I'll turn it over to Tim.

Timothy M. Armstrong

Thanks, Eoin, and thank you to everyone, joining the call today. I want to start by thanking the over 5,000 AOLers for helping AOL take another step forward in strengthening the company and moving AOL back into the zone of industry growth and industry competitive products. AOL continues to chart a course of building a leading media technology company in the middle of a significant disruption period in both media and technology. AOL has carefully chosen the markets we want to compete in, and each of those markets is large and non-commoditized.

Our results show progress in the following: In video, AOL is a leader in desktop, mobile and over-the-top video, as well as syndication and video ads. Programmatic advertising: AOL is a leader in the industry transformation of manual to automated advertising, with unified cross-screen campaigns. The global consumer brand space: AOL is a leader in building global consumer brands for the Internet and mobile and plasma screen, and we offer advertisers differentiated brand-building experiences. In the resource allocation area: Resource allocation continues to be a strategic strength for AOL. We are continuing to make the toughest decisions we can to spend time on the biggest opportunities. In shareholder value: AOL is debt-free, and we continue to buy back shares at attractive pricing, and investors are getting the combination of strong operational execution and strong value creation. And in talent: AOL has strengthened our management team and overall talent during the quarter, and we have also been great partners for external talent. Talent is a key differentiator for AOL and our strategy.

Moving to the Q3 operational improvements. We continue to show growth in our consumer audiences. We grew domestic users 4% to 115 million users, the fifth consecutive quarter-over-quarter, year-over-year growth. More encouraging, however, is our cross-platform audience growth. We now have 156 million users domestically, up 8% in Q3, which is the second-fastest rate of cross-platform improvement amongst the top 10 Internet companies.

The consumer brand business picture also improved. We returned to double-digit display growth in the Brand Group and positive OIBDA through revenue growth and our continued focus on expense management. Our brands completed key projects and partnerships during Q3. At AOL.com, during Q3, we launched new mobile and tablet experiences and have scaled the integration of video.

The Huffington Post also expanded in Q3. The Huffington Post is now in 5 continents, including the top 5 European markets, and we now reach almost 80 million global consumers a month. HuffPost launched HuffPost Deutschland during Q3 and announced the future expansion to Brazil in partnership with the Abril Group. The Huffington Post is also expanding in lifestyle content with the Third Metric, which redefines success beyond money and power and has grown our lifestyle traffic by 50% year-over-year.

HuffPost Live also continues to break records. We just passed 500 million video views since its launch, and we've had over 10,000 on-air guests to date.

TechCrunch is another brand that grew globally and in the video market. We launched a TechCrunch TV hub, where users can search and view original video content. Global TechCrunch and TechCrunch Disrupt brands are growing rapidly. Our San Francisco Disrupt event in September set records for attendance, online usage and video, and we had a great partnership and a sponsorship with General Motors for that event. Just last week, we hosted Disrupt Berlin to great success, with close to 2,000 attendees in its first year and the Hackathon attracting 500 entrants from 39 different countries. This is exactly what we are talking about when we say we are focusing on only large-growth, non-commodity areas.

StyleList was a big part of fashion week this year, holding a StyleList fashion show and partnering with Procter & Gamble for that event. We had a similar experience last night in our partnership with Sarah Jessica Parker in our city.ballet. video project. Citi is sponsoring the series, and we held a screening down in Tribeca, which was a big hit. In

content partnerships, we expanded our relationship with the talented BermanBraun to team up on MovieFone to give the iconic entertainment brand a new design and enhanced user experience.

Patch made significant progress on 3 fronts during Q3: first, Patch completed a significant restructuring, removing costs and headcount and operationally focusing on a simplified set of product and business activities; second, Patch has improved revenue on core towns by implementing the key product changes and opening up the Patch platform; and finally, Patch has held a number of partnership conversations with partners and has received interest at a national, regional and local level. We expect Patch will move to run rate profitability by the year's end through a combination of operational changes and a partnership model for operations or strategic alternatives.

In video, we are continuing to build a full stack of video services for consumers, partners and advertisers. In video, our AOL On video brand is now #1 in video ads served, with 3.7 billion ads; #2 in total video content views for the quarter, up 30%; #2 in content video unique viewers, up 70%; and #1 provider of premium content for 13 categories in video. We increased the number of videos in our library by over 90% year-over-year, with close to 800,000 high-quality videos. We grew the number of publishers using the AOL On network by over 100%. This quarter, we added ESPN, Conde Nast and TMZ, among others. We grew the number of campaigns on the network by over 50% year-over-year.

During Q3, we also made meaningful strategic investments in video platforms with our deal to acquire Adap.tv. After researching the programmatic video marketplace for a year, Adap.tv was our first choice in partnering for 3 reasons: the first reason is the Adap team and the leadership. They are an exceptional team. The second was the -- the second reason was the simplicity and strength of their strategy, a strategy that will allow buyers to buy media as easily as you can transact consumer goods and e-commerce. The third was their product and platform. After spending a year looking at build versus buy, the Adap.tv platform is uniquely positioned as a network effect marketplace for brands and TV advertisers.

In our advertising and advertising platforms business, the first big news in the ad platform world is that we added a world-class leader in Bob Lord, the former Head of Publicis Digital. Bob started in September and is already having an impact internally and externally, and his leadership will make a difference in the coming year.

During the quarter, we grew all revenue lines for the third consecutive quarter in advertising. We grew revenue from the Ad Age 100 and the global agencies quarter-over-quarter and year-over-year. We grew the number of Premium Format impressions by 80% year-over-year and added many new third-party publishers to the Devil Network. Our ad pricing was up 4% year-over-year, which is a meaningful difference from AOL from what you're hearing in the marketplace around programmatic.

On the DSP side, AOP grew revenue over 50% quarter-over-quarter. We doubled the number of campaigns on the platform quarter-over-quarter. And on the SSP side, we now have signed up over 30,000 advertisers to bid into our MARKETPLACE. We grew the number of publishers approximately 40% quarter-over-quarter in MARKETPLACE, and we announced the expansion into Europe in September, and we will soon be operational in China and Japan.

2014 will be a big year for programmatic advertising. AOL is a leader in this space and held the first-ever programmatic upfront. The upfront had 650 buyers in attendance in the event, featured 5 out of the 6 holding companies presenting on stage, and we have seen commitments from 5 of those partners for the programmatic partnerships in 2014.

In Search, advertising grew year-over-year for the fifth consecutive quarter -- I'm sorry, the fifth -- yes, fifth quarter of year-over-year growth, and we had 12% year-over-year growth in Search on AOL.com. In commerce and membership, we have a great team in place and the subscription DNA to test opportunities for growth in subscription. Membership churn remained at historical lows at 1.5 -- 1.4%, and we hit a new record-low churn. ARPU is up quarter-over-quarter and year-over-year. We launched a new subscription service offering called Gathr in late September on 3 DMAs, and we are testing that product now. We signed up over 45 partners to date, and more are eager to join that product. It's early days, but we are committing to exploring avenues of growth in the membership segment.

Importantly, as we look into 2014, the teams are working on a very limited set of platforms that will allow AOL to have another year of improvement. There's 3 areas that we're focused on. The first is the globalization of our power brands and consumer brands. We are building our power brands into global platforms in very important spaces, with strong foundations in video, mobile and international. We have a growing house of brands that serve some of the most important markets in the world.

The second is scaled video. We are building a consumer and advertising video business, and we will continue to scale video across AOL and our partner platforms. The third area is to automate global brand advertising. We are building enterprise capabilities for our partners and customers to directly integrate AOL technology and platforms into their businesses and improving the automated ability to improve the results of advertisers and publishers.

Before I turn the call over to Karen, I wanted to remind people that Karen's first earnings call was done from Marty Lipton's loft and through the Sandy storm, because our building was in the flood zone. She didn't miss a beat that day, and the company isn't missing a beat, in large part, due to her leadership.

With that, I'll turn it over to Karen.

Karen E. Dykstra

Thank you, Tim. Good morning, everyone. Q3 results were strong and straightforward, so I'll quickly point out what I think are the highlights and then leave plenty of time for Q&A.

First, revenue and profit growth accelerated, thanks in part to the inclusion of Adap.tv in September. Excluding Adap.tv, revenue and profit trends were also strong. The Brand Group returned to positive adjusted OIBDA on double-digit display revenue growth, and in AOL networks, Third Party Network returned to double-digit revenue growth. Second, we made material progress again this quarter, reducing our expenses, and adjusted OIBDA margins improved sequentially in all 3 of our reportable segments. We continue to balance near- and long-term value creation, repurchasing 2.5 million shares, while investing heavily for future growth across segments. And fourth, our Q3 operating income, net income and diluted EPS were negatively impacted by restructuring costs of $19 million, as well as approximately $30 million noncash asset impairment charges, which were primarily related to our Patch operations.

On a consolidated basis, total revenue grew 6% year-over-year in Q3, reflecting 14% growth in global advertising revenues and a 7% decline in subs revenue. As you know, our advertising strategy is aimed at growing both sides of the barb -- marketing barbell, deep marketing solutions and programmatic, and in Q3, we continued to grow across all advertising revenue lines year-over-year. Our strategy is resonating with our advertiser partners and is evident today in our results. Adap.tv strengthens our offerings, and advertisers are increasingly thinking of AOL as a premium full-service, multi-format and multiscreen advertising platform.

Turning to the segments and starting with the Brand Group. The headline here is double-digit display revenue growth and a return to positive adjusted OIBDA, which improved by $20 million year-over-year. Display growth was driven by growth in domestic and international markets, due primarily to improved pricing on AOL Properties. We sold more premium formats this quarter across most of our properties, and that is a very promising trend. Brand Group Search revenue grew 6%, driven by higher revenue per search across our properties. As a result, brand segment margins improved meaningfully both year-over-year and quarter-over-quarter. The expansion has come from profitable revenue growth and expense reduction, particularly in Patch as we continue to invest for future growth.

At AOL Networks, revenue accelerated meaningfully, driven by 32% growth in Third Party Network revenue, which included about $18 million from Adap.tv, following the close of the acquisition on September 5. Excluding Adap.tv, Third Party Network revenue grew strongly, up 17% year-over-year, reflecting growth in the sale of our premium formats, primarily video, across our platform. Additionally, as we pivot our offering to our programmatic products, we saw significant growth from our DSP, AdLearn Open Platform, and our SSP, MARKETPLACE by ADTECH, both of which grew very strongly quarter-over-quarter and year-over-year. I'll point out that the segment's overall growth rate was negatively impacted by approximately 2 percentage points due to the absence of revenue from StudioNow, which we divested in the first quarter of this year, and by less AOL brand inventory being sold through the network.

I want to spend a moment on Adap.tv, because it's truly a success story. Amir and his team are running at full speed and disrupting the industry with Adap.tv platform. Publishers and advertisers on both sides of the platform are taking notice. Adap.tv is an essential element of our programmatic advertising strategy, and they were a significant contributor to our growth this quarter. On a pro forma basis, Adap.tv grew over 150% in Q3 year-over-year and was slightly profitable. This is tremendous performance, and we are thrilled to have the team as part of AOL.

Going forward, AOL will utilize the Adap.tv platform, leveraging data and technology and simplifying development efforts to build products for publishers and advertisers. AOL Networks is now an end-to-end programmatic platform for advertisers and publishers, capable of running display and video campaigns across all screens, including mobile, and you should expect to see us continue to invest for growth here, improving the platform and further enhancing our offerings.

In a very short period of time, the team has made an incredible amount of progress, returning to double-digit growth. And we'll have -- but I wanted to also point out we'll have difficult comps in Q4, which will impact our growth rate for the quarter. You'll recall that last Q4 was particularly strong due to the presidential elections. But more importantly, we believe we are positioned for the business well for 2014.

In the Membership Group, subscription revenue declined 7% in Q3, driven by a 13% decline in subscribers and mitigated by continued historically low churn of 1.4% per month and by a 9% year-over-year increase in ARPU as we continue to benefit from price increases in the second half of 2012 and early 2013. Additionally, Search and display revenue from the AOL Client and Mail declined. Despite the decline in revenue, margins remain strong as we continue to drive efficiencies in the business. The rate of decline in subscription revenue ticked up slightly from Q2, as we expected, as we lapped price increases from a year ago. We expect more of the same in Q4, when we lap both the Q3 and Q4 2012 price increases. We remain very pleased with the value we have provided to our subscriber base and continue to assess additional means of enhancing the value further, which could be coupled with further price increases.

Additionally, we are now live-testing a new subscription product, Gathr, as an avenue for exploring means of future growth. We are still very early-stage with Gathr, so there is little to report right now, but we are happy with our progress and we hope to have more to say about that on our next call. As you expect -- should expect, we're investing in Gathr's growth, and this additional expense will reduce Membership segment margins, although they will remain very strong.

Turning to profitability. Adjusted OIBDA grew 19% year-over-year, driven by revenue growth and expense reduction, which resulted in continued overall AOL margin improvement. While cost of revenues for the quarter, excluding TAC and the impairment charge, were essentially flat, lower overall expenses were driven by a $19 million decline in general and administrative expense, reflecting lower marketing, personnel and legal expenses. Lower overall G&A was largely reflected in the corporate and other segment, with almost $12 million reduction. The third quarter corporate and other segment included expenses associated with the acquisition of Adap.tv. We continue to focus our efforts on the biggest growth areas for the company while scaling back on other areas. This has resulted in meaningful reduction in our expenses that you are witnessing, and you should continue to expect us to better leverage our expense base.

Looking at Q4, I remind you that both cost of revenue and G&A will increase sequentially due to the inclusion of Adap.tv for the full quarter and the normal increase in expenses we see during the seasonally strong fourth quarter. On our last call, I noted that given our recent expense reductions, I was comfortable with giving full year adjusted OIBDA guidance of roughly $30 million above the $435 million consensus estimate at that time, which resulted in consensus rising to roughly $465 million. We are still comfortable with that guidance, as we are stepping up the level of investment we allocate to our ad platforms and Gathr.

A couple of additional housekeeping items, mostly related to Adap.tv. Our stock-based comp will increase by about $5 million in Q4 and amortization of intangibles will increase by roughly $6 million from Q3 levels.

Turning now to the strong balance sheet. We ended the quarter with $168 million in cash and equivalents. We have not drawn on the credit facility, and our free cash flow for the quarter was $65 million. Free cash flow for the period declined $7 million, primarily reflecting payments made related to the restructuring charges we have taken.

We've been aggressive buyers of our stock, repurchasing $85 million of stock or 2.5 million shares from July 1 through today, with $52 million of that completed in Q3. Year-to-date, we are very pleased to have repurchased almost 4 million shares of the company for $135 million, at an average price of $34.75 and have approximately $115 million left on our authorization.

To conclude, Q3 was a very strong quarter for AOL. We improved revenue, expense and OIBDA trends, and we repurchased shares at attractive prices. We are very excited about our continuing trend of consistent improvement at AOL and are well-positioned for 2014.

And with that, I'll open it up for questions and back to the operator.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Brian Pitz representing Jefferies.

Brian J. Pitz - Jefferies LLC, Research Division

Could you comment on whether the focus on video was a recent shift in strategy from your original 2009 mission?

Timothy M. Armstrong

Yes, Brian, I think if you go back and look at what we had decided to do in 2009, video was one of the things that we talked very publicly about. It's also one of the areas, I think that AOL was a first-mover advantage in terms of us both changing the AOL homepage to have video. Second thing was the goviral and 5min acquisition in 2010, which really have built us into probably the largest syndicator of premium content on the web. And you saw, basically, a pretty dramatic improvement. I think, I may have this number wrong, but I think we were #27 on the web in video in 2009, beginning of 2010. And I think getting up to the point where we're #1 in video ads served and #2 in content views and content viewers is pretty significant, and that does not get built overnight. I think that's been a multiyear investment for us. I would also just underline the Adap.tv piece, where we are fully building out the video pyramid in Adap.tv. We spent a year looking out at all the video platforms on the web, and from the vantage point of where we sit, Adap.tv is the only true marketplace in video right now and a significant advantage in technology team and product there overall. So it's been a multiyear investment. We're going to continue to invest in it. And if you look at things like Huffington Post Live, which has crossed 500 million video views, I think AOL has been a big investor and will continue to be an investor and leader in the video space.

Operator

Your next question comes from the line of Ross Sandler representing Deutsche Bank.

Ross Sandler - Deutsche Bank AG, Research Division

Two questions, first on the AOL Networks and then on the Brand segment. So in Networks, you guys are shifting the model from the classic Ad.com direct sales approach to more of a programmatic platform approach with the DSP, SSP and now Adap. So how do see your economic take rate for each dollar of gross revenue evolving over time as programmatic takes over? And Karen, can you talk about what drove the 500-basis-point reduction in TAC in Network? And then a question on the Brand segment. Obviously, some very solid margin improvement there. How much of that was from Patch versus other cost-cutting? And how much more inefficiency do you think you can still take out of that segment?

Timothy M. Armstrong

Ross, let me start off, and then Karen can talk about the take rate on ads and maybe the cost structure around the Brand Group. Just to remind everybody, AOL has a very significant asset inside of it, which is called AdLearn, which is essentially how we target advertising. So whether it's done specifically through the Ad.com business or whether it's done through the DSP, SSP and now Adap.tv, basically, the world is moving from manual to automated. So our migration path there is really clear, and we have clear changes in our customer base and a positive -- meaning over 30% of the customers now on the programmatic side of our stack come from the traditional Ad.com partners as well. So what we're seeing is essentially us updating ahead of where the market's going on the technology side, targeting side and programmatic side, and we're migrating our current customer base, which they are doing also themselves naturally. So it feels like there's a 1 plus 1 equals 3, over time, in that business. But we see a strong connectivity between Ad.com and where we're going in the future in programmatic. And Karen can hit the take rate and the Brand Group cost.

Karen E. Dykstra

So the take rate or the TAC reduction, as I look at where the revenue growth came from, we had a heavier component of video in the Third Party this quarter, and that had slightly better net margins as the video was higher than our typical Ad.com margin. In terms of where the breakout of the growth and where that came from in the performance, I think what you're seeing is the obvious escalation of move to programmatic, and our AOP Open Platform and our MARKETPLACE products are growing nicely, with Ad.com also growing nicely in the quarter. And Third Party has obviously got Adap.tv in it. Our Adap margins, our net take rate are, as we said on the last call, in the 35% to 40% range. So -- but overall, the third -- the Networks group did -- had growth from all areas this quarter, but Third Party and also international versus U.S. was nice and strong. So our international growth was just as strong as our U.S. growth this quarter, with a great performance and a great quarter coming out of our old goviral business, which is now Beyond. So moving on to the Brand Group profitability and margins and cost reductions, we did have improvement in Patch this quarter. I think it was somewhere in the $6 million to $10 million range of reduced net investment in Patch, but we also had expense reductions across the rest of the brands as we continue to focus on the highest-value products and areas. I think Tim mentioned in his opening remarks that we're very focused on what matters the most and narrowing down our focus. So we have taken costs out in nonperforming businesses within Brands and have been working hard to -- hard and seriously look at all the cost structures across the businesses for all functions. So I think you saw it was not only from Patch, it was from Patch and the reduction of costs across the rest of Brands as well.

Operator

Your next question comes from the line of Ron Josey representing JMP Securities.

Ronald V. Josey - JMP Securities LLC, Research Division

So I wanted to ask Tim a question on the pricing. I think you said it was up 4% in the quarter, and I wanted to know -- it's sort of interesting, given what we're seeing in the industry overall. Is this pricing growth due mostly to premium formats that are specific to AOL, like Devil? And then on the other side of that, if you can talk about volume. I know you had mentioned maybe Mail and AIM maybe going down on the subscription business. But any insight on what you're seeing on volume increase? And then one quick follow-up on EBITDA, please.

Timothy M. Armstrong

Yes, so I would just say on pricing overall, we specifically have been migrating our ad services business into deeper, rich content-driven ads to the premium formats. And that's really driven -- there was an 80% growth in the Premium Formats business, which allowed us to grow ad pricing. Also, there's a better consumer experience. When we look at the statistics of those ads, they performed better for consumers, essentially taking the same space you'd run an lower-value ad, putting higher-value content, more content-driven ads and then you're getting a better pricing. Also, our movement to video has been helpful in terms of overall pricing. And then, by really working diligently on yield management overall, we've been able to really do a good job overall. And I get this question a lot externally when I go to meetings with other publishers about this in general, but really, it's the combination of movement to higher-quality premium format ads, movement to video ads overall and then really big focus on the premium -- I'm sorry, on the yield management. If you go to the AOL homepage today, there's actually a premium format ad from Chobani, the yogurt company. And I think just looking at that ad versus other ads, you see why essentially it's more attractive for consumers, and essentially, that's what leads to the higher pricing overall. But we've done a very good job on pricing. And then in terms of the volume of ads overall, so our ads come from 2 different places right now: one is owned and operated properties; one is the network properties, both in the display and video marketplaces. Now with the addition of Adap, there's another marketplace of inventory overall. I won't go into detail, but we have -- we serve billions of impressions a day right now. We are, for 2014, planning on increasing the number of ads we serve on a daily basis, and that's something that we're really, really focused on. But the volume of ads and the volume of formats in video is essentially coming from the growth areas within the owned and operated properties and then the growth rates across the premium publisher network, which is scaling pretty significantly.

Ronald V. Josey - JMP Securities LLC, Research Division

Great. And a quick follow-up just for Karen. I think in the release, you said Membership benefited in part from a legal claim. Can you help us better understand what that was?

Karen E. Dykstra

Yes, it was just a couple million dollars. It was a settlement of an action that has been in process for a couple of years. So we had the legal claim. It was a couple of million dollars. We also had a couple of million dollars of onetime costs related to Adap.tv in the quarter, so they more or less offset.

Operator

Your next question comes from the line of James Cakmak representing Telsey Advisory Group.

James Cakmak - Telsey Advisory Group LLC

So one of the primary aspects to the digital video story is capturing the television ad dollars. So Tim, I was hoping you could reconcile some of the patterns that we're seeing. For TV networks, we're seeing momentum in tailwinds in ad revenue, especially as they invest in original programming, where ratings and viewership is actually rising. So when you think about capturing these dollars, where do you see the opportunity? Is it broadcast or cable or perhaps vice versa, given the targeting? And looking at offline as a whole, what is the lowest-hanging fruit? Is it print, television or something else?

Timothy M. Armstrong

Sure. So James, there's -- in a very precise manner, basically, 2 years ago was the first TV digital upfront targeted at TV dollars. It was basically everybody meeting each other and shaking hands. The past year -- this year, was the first time that basically the real, I would say, hard mechanics and piping behind the TV digital changes happened, where, AOL On, our system, is built into Mediaocean, which is the largest platform for TV buying in the U.S. So there's actually a physical piping change this year that went to effect, where our inventory shows up in a TV buyer's screen, where they can actually buy digital inventory. That's only going to get bigger and stronger overall. And I think what you're seeing going at the most macro level is at the holding companies, a lot of the TV and digital video groups have now merged. They were not merged a year ago, but you're seeing one set of buyers start to emerge, who are supposed to be buying TV and video. And overall, most of the major customers we're meeting with and talking with for 2014 have explicit goals about moving a percentage of their TV budgets to digital. That is happening at the same time the traditional TV players are investing more in content, the online players are investing more in content. And I believe essentially, over a longer period of time, you're basically going to have the best of both worlds. You're going to have the best digital video companies and the best traditional people essentially feed into the pool of dollars, with the digital people with the most upside because we're all starting from a small base and there's obviously a giant tailwind from consumers using digital. In terms of the lowest-hanging fruit, overall, in the media space, basically, in a 2-step process, one is essentially staying very close to how people get information. So one of the things we talk about a lot internally in AOL is the humanization of the Internet, where consumer usage and media dollars are going to follow. There's been a giant notion in the Internet that the Internet is changing everything, and that's true to some degree. But most people in the world still get up at the same time, look for information at the same time. At night, they want to be entertained, those things. So from a migration standpoint, the lowest-hanging fruit tends to be in the information and entertainment sectors that most closely follow human behavior. So in the news category, Huffington Post, which has been growing very quickly. I believe we're taking share from some of the more traditional aspects of when people want news and information. In the video business, because we're able to do a high-scale syndication, people who are interested in entertainment or sports or those type of things, we're able to take our 800,000 partner -- high-quality partnership people and put them out across the web with ads attached to them. So I -- the same hit list you probably have is the same hit list we have. The areas getting disrupted the fastest are the areas where the Internet clearly is faster, better and has more analytics and metrics on the consumer side than what's available in offline media. I would say one of the big parts of our business we're really happy with and being successful with is partnering with traditional media companies to expand their businesses. So we benefit whether we're doing it or we benefit whether the partners are doing it. We're just as happy to have the partners use our platforms and pipes as we are to be directly in the market ourselves.

Operator

Your next question comes from the line of Joyce Tran representing Bank of America.

Joyce Tran - BofA Merrill Lynch, Research Division

Just a few questions. On Search, Search revenue decelerated quite a bit. And I was wondering was that due to Google's changes to the smart pricing on the network search side? And then also, on Patch, can you comment on the restructuring progress? And how many towns remaining? And how should we think about Patch going forward in terms of the next milestones?

Timothy M. Armstrong

So on the Search front, basically, we have a couple of things happening. One is we're very bullish on our ability on owned and operated properties, continuing to partner with Google and work on Search. And again, I think AOL.com had growth on the organic side of that property for Search, which is great. And on the partnership side, we essentially have partnered to bring Search properties out to the Internet. In that business, we're kind of lapping what we started to do last year overall. So we understand the Google relationship very well. We understand what they like and don't like, and we understand what our ability is to drive Search as a growth business. We've been doing that. We're continuing to do that. I think there's, obviously, tactics you can take to try to grow it faster. But whether or not that has a long-term benefit or not, we're being really careful about making sure that we have strong growth organically on the owned and operated properties and very healthy growth in terms of partnerships and healthy relationship with Google overall. And so the Patch...

Karen E. Dykstra

Just on the Patch restructuring, I'll start it off. I mean, as Tim gave you the outline in the opening comments, but in the beginning of the quarter, we took some cost actions. We reduced some of the lowest performing of the sites, of the towns. We took cost out of the corporate group here in New York, and we really focused on a couple of product enhancements going forward. We actually have made really nice product progress, I should say, and have done quite remarkably well in the last quarter on the product end. But we continue to look at the cost structure and are committed to bringing the cost structure down by the end of the year, and as Tim said in his opening comments, committed to either a partnership, some kind of model or transaction by the end of the year, bringing Patch to exit the year at profitability.

Operator

Your next question comes from the line of Eric Sheridan representing UBS.

Eric James Sheridan - UBS Investment Bank, Research Division

One of the questions we get the most is around Brand Group margins going forward. Can we understand a little better maybe some of the investments you're making today that act as headwinds on Brand Group margin, whether it be video, HuffPost international, TechCrunch? Just to understand a little bit better, as Brand Group continues to grow, how that margin might show some improvements over the next couple of years.

Karen E. Dykstra

I think you mentioned a number of them, our investment areas. So we've been quite successful with Huffington Post and have been improving the profitability of Huffington Post. But at the same time, we are quite excited about our international expansion in Huffington Post, and those things take some time to evolve. Our investments continue with HuffPost international, with HuffPost Live. We've got investments in the tech area. And primarily, we're looking at investments in our homepage right now. It is our biggest property, and we're excited about the new design options and the new model for the homepage. So we continue to make investments there. And then we -- of course, Patch is within our Brand Group, so you see the improvement in the margin related to Patch. So I think we continue to see some improvements in the Brand Group margin, and we continue to invest in those areas that we talked about. We're investing in platforms, we're investing in engineering, we're investing in people, we're investing in international as well. So all of those combined, I think you'll continue to see an improvement in the Brand Group margins. And Tim, I don't know if you want to add anything to that?

Timothy M. Armstrong

Yes, I would just say I think Karen hit it all, but our investments have been very precise or getting more precise there. I think there's other areas that we're continuing to work on, the CMS systems we have, all those things. We have investments in some technology areas around the Brand Group, which will -- we think will continue to pay off longer term. I'd also say our model is unique in the Brand Group from a content space in the fact that if you look at some of the other large people investing in other platforms, they tend to spend a lot of money on content, on licensing and those things, and we have the advantage of having partnerships and our owned and operated. And I think the improvements you're seeing this quarter are basically part of our long-term strategy to have healthy margins, but also really healthy brands in that space.

Operator

[Operator Instructions] Your next question comes from the line of Mark Mahaney representing RBC Capital Markets.

Mark S. Mahaney - RBC Capital Markets, LLC, Research Division

Tim, if I could go back to that question about the sustainability of the improved pricing on the AOL Properties, and you mentioned that there are some new ad formats that are helping raise those prices. Can you talk a little bit more about how sustainable that pricing increase is? Is there also elements like more advertisers bidding for that placement or for that -- for the exposure, for the impressions? Is there -- are you also able on just same-store, I guess, ad units to raise pricing as well? How do we think about that? Will you be, for the next 2 or 3 years, able to do that kind of single-digit pricing increase?

Timothy M. Armstrong

Yes. So overall, let me just give you the dynamics underneath the business and then we can talk about pricing. I don't know what's going to happen to pricing in the future, but we remain pretty bullish that we're able to do that. So at the top level, we have more advertisers and more publishers in our network overall, both owned and operated, and on the network side of the business. If you dig into that one level, what you're seeing is as we're adding more advertisers and as we're adding more publishers and as we're continuing to grow out the AOL Properties, the transition of -- we're essentially serving a screen -- whether it's on mobile or desktop or tablet or plasma, the ability to put up higher-value, better-performing ads overall is what is essentially allowing us to keep pricing on a growth trajectory. And I think from the standpoint of what you hear in the marketplace around programmatic ads, overall, just like anything else in the world, if you let everything run loose in terms of how things are put into a marketplace, we don't do that at AOL. We essentially have a very, very high-scale marketplace, and we have a growing marketplace, with a network effect of buyers and sellers. But giving people more choice, better formats and the ability to target things better allows them actually to pay more per ad, but also get a higher return rate per ad. So on a same-store sales basis, if you look at what we've been able to do in putting more video and more premium formats into places where I would say there's commoditized inventory of banners, that's what's continued to lead to the overall growth in pricing. When you kind of look forward to what's going to happen in the marketplace, over time, again, this a differentiated part of our strategy. We fundamentally believe and know that brands will pay higher prices to be around more quality inventory, more quality experiences and more -- higher-quality brands overall. And if you're a large brand customer, you could be spending significant amounts of money. There's between $500 billion, $1 trillion spent on advertising. You're not going to put your ads against places that are going to damage your brand, and it's important for us and the future of pricing that we continue to migrate to premium formats and more video. And I'd leave it at that. Whatever everyone else is announcing in the marketplace around pricing, we have a specific strategy with yield management attached to it, and we're sticking with it.

Operator

Your next question comes from the line of John Blackledge representing Cowen & Company.

John R. Blackledge - Cowen and Company, LLC, Research Division

Just wondering, the expectations for Adap.tv's contribution to network EBITDA in 4Q and also in '14. And also, along similar lines, as the network business migrates to a higher mix of programmatic, what's the longer-term margin profile for that segment?

Karen E. Dykstra

So the Adap, without giving out the exact numbers on Adap.tv, they were already slightly profitable in the third quarter, and we expect them to be profitable in the fourth quarter, slightly profitable. As I look forward to 2014, then I would say they continue to be profitable, without giving specific numbers. I think the real issue is -- the truth is that they could be more profitable if we want to slow down the investment in Adap.tv. In fact, they're doing so well and growing so fast on their own that we are continuing to invest. We hired some 25 people at Adap.tv since we hired them in September, and we're looking for another 25 to 30 people right now. So we continue to invest in the product and enhance the product. We are huge believers in the growth there, from -- worldwide growth there and are going to continue to invest. But we do expect that it will contribute to the fourth quarter, and it will continue to improve and contribute more in 2014 as it grows. As to the long-term margins of the network business, I mean, I think you're seeing that the improvement in our networks business, as we increase our penetration on some of our products on the SSP and the DSP, video, so we've got the whole bundle now. I think that we -- on one hand, I'd say that the networks margins are going to continue to improve, and I expect them to continue to improve. And I expect to continue to invest in that business. I think we've got a real gem in Adap.tv, and that, combined with our other products and our AOP and our MARKETPLACE, are really a tremendous growth engine for us. So I think that I would see that continued investment going along. I've said previously that I think it could be like high-single digits in terms of networks. I think we can look at that as an aspiration. But at the same time, I think that -- and that's after the -- our general take rate margin rate, net of TAC, in the 30% to 35% range. But I think that it's a huge investment area for us, at least for the foreseeable future.

Operator

Your next question comes from the line of Deb Schwartz representing Goldman Sachs.

Debra Schwartz - Goldman Sachs Group Inc., Research Division

A follow-up on Adap.tv. Wondering if you could share with us what Adap.tv revenue would have been for the quarter. Just curious if the $17 million from September was a representative run rate on a monthly basis or was something different in September from either a seasonal perspective or being owned by you. And then, similarly, that $17 million number was quite strong. Can you kind of give us a sense of what's driving that, whether it's pricing or inventory or growing the number of partners?

Karen E. Dykstra

So without giving the exact number, I would say that the number in the quarter, on a pro forma basis, would have been about 150% growth. What's driving it is more publishers, more inventory, the market itself growing towards programmatic and the fact that it is a really strong, best platforms to be on and that the competitor products are generally not a full platform end to end. So that's what's driving the growth.

Timothy M. Armstrong

Yes, I mean, I think the easiest way to think about is the active buyers and sellers have been increasing Adap, happen to have record days in terms of the revenue in September overall. But that -- there's a lot of interest in the product. And then when you think kind of through some of the areas inside the product that are growing, there's things like private exchanges and other things that are helping to drive that growth. So you have a combination of people interested in that marketplace, so more buyers and sellers, you have a combination of product expansion, both in terms of targeting ability, planning, buying, serving, private exchanges, those things and then a much more, I guess, interested customer base by area. So if you look at agencies and some of the areas where linear TV is starting to come into play, those things, you're starting to see growth in those areas.

Operator

Your next question comes from the line of Mark May representing Citigroup.

Mark May - Citigroup Inc, Research Division

There's been a general view that the Ad.com business represents a headwind or a noose for the company, but I'm interested in the comments that you made earlier that suggest that it actually represents more of a conduit for growth for parts of your programmatic business. So I wonder if you could just expand on that. Maybe are there actual examples that you could give to help us understand that a little better?

Timothy M. Armstrong

Sure. So Advertising.com, if we go back and look at a little bit of history, Advertising.com was a business that was struggling a few years ago. And essentially, what's allowed Ad.com to become a growth engine again for us is a simple movement of a few different aspects. The first is the unlocking of the technology which was proprietary inside of Ad.com into a more open format. So if you look at our products like AOP and MARKETPLACE, we're essentially empowering, in a programmatic sense, the core aspects of Ad.com to go directly into our customers -- into our advertisers and publishers, and they are able to take, at an automation scale, take advantage of things like AdLearn and the targeting technology there. So that's actually been an engine of growth, taking traditional customers, moving them to programmatic and letting them continue to scale. Second piece overall is the Ad.com business itself, from a machine learning standpoint, has one of the deepest machine-learning capabilities in terms of what impressions are valued at. And at the end of the day, whether you're in the network business or whether you're in programmatic or any other form of advertising, just the singular ability to understand the value of an impression is really critical and something that we're investing in. And then the third thing is, to your point of it being helpful for the rest of the drivers, because we have a large customer base and we have excellent technology around targeting, planning, buying, serving, it allows us to actually migrate a large significant group of customers that are moving in this direction. And Adap.tv should only benefit, actually, from the Advertising.com customer base and technology scale. So if you take a large global holding company like a Dentsu, for instance, they have adopted -- not only partnered with us on the brand side, they partnered with us on Huffington Post Japan and doing big brand stuff with us. They also are looking to partner with us in terms of programmatic changes using Ad.com and Adap.tv and those types of products and services. So you take a traditional customer and inject them with Ad.com and programmatic technology, and that's why this, we believe, is a very strong business for us to be in, and very few people have the capability we have at that level.

Operator

Your next question comes from the line of Laura Martin representing Needham & Company.

Laura A. Martin - Needham & Company, LLC, Research Division

Tim, for you, last time I saw you, we were at the programmatic upfront, and I'm really curious as to whether you signed any advertisers up in that upfront. And also, their focus is not on pricing discounting, and I'm wondering if you were successful at getting premium pricing from your programmatic efforts compared to the rest of the market, which is really getting a lot of price pressure. And then Karen for you, one of the questions I get a lot, like yesterday, when they raised the Twitter pricing, your stock was really running, and the Rocket Fuel success. It feels like AOL runs in sympathy with some of these other companies that are accessing capital right now. Do you think that's because you guys are so much cheaper? Or is it you guys are viewed as a substitute for them on a higher-value basis? It does seem like you guys rise in sympathy with some of these other deals. I'm interested in your comments on that as well.

Timothy M. Armstrong

Sure. So on the programmatic upfront and what we're seeing in that marketplace, number one, we held the first programmatic upfront. We had 300 seats, 650 people showed up for it. And we got commitments from 5 of the 6 holding companies. We have gotten financial commitments from those 5 companies overall. And we believe that from a standpoint of what we're able to offer in the marketplace, that's a -- AOL is at the leading edge of what's happening in that marketplace, and I'd expect us to have beneficial revenue spending and customer relationships in that going forward. The second piece is just in terms of what the commitments are, and this is really important because there was a number of questions we got of "Why would you have a programmatic upfront if it's a marketplace? Can't people just participate in the marketplace?" One of the key areas of the marketplace is all of our customers, including the large holding companies and large advertisers, want to commit to someone who's actually committed at a high-scale level to make sure, over the coming years, that there is a partnership on programmatic that helps them go from manual to automated. And that commitment level is real, it's tangible, and I believe we're going to see it throughout 2014 and 2015. And I think the pricing on programmatic, again, because we focus on premium scale and premium formats, has been strong. So at a summary level, I'd expect the programmatic marketplace overall to grow. I'd expect us to benefit, both on the publisher and advertiser side, and I'd expect pricing, over time, to remain positive and for us to continue to do different types of products in that marketplace, like private marketplaces and those things, which actually may have pricing increases overall.

Karen E. Dykstra

Yes, and I'll comment on the rest of the question, Laura. The -- I see it as all different comps. So we have a lot of different businesses and some really interesting fast-growing assets tucked into AOL. So when people see activity in a number of different types of companies' business models, we tend to be impacted. We're obviously a combination of a lot of different business models, with both the brands and the video and the programmatic, all of which have some interesting companies out there that are coming out in very fast-growing and high multiples. I would say that we have a strong base in all of those elements, and our numbers compare quite favorably to those companies. So I don't know if I would say that's in sympathy with as much as in concert with some of those rising multiples.

Timothy M. Armstrong

And also, I'd just comment -- I mean, I think one of things that AOL is, people -- I still think there's the brand things we're working on, of what does AOL represent in the future. And if you look at the difference with Adap.tv and Rocket Fuel and you think about the video investment we have, you think about the big Brands Group overall, at a lower multiple, you're able to get AOL at what I consider to be a discount for what our overall business is and how strong it is and what we're hoping to see in the future.

Operator

Your next question comes from the line of Peter Stabler representing Wells Fargo Securities.

Peter Stabler - Wells Fargo Securities, LLC, Research Division

Tim, a couple of questions on brand advertising. So there's no doubt that the programmatic landscape is growing really quickly. However, when we talk to brand-oriented advertisers, we still encounter a significant amount of concern around quality of impressions, transparency, et cetera, and there's been a steady drip of reports in the trades about unviewable impressions and quality and that kind of thing. And then, on the other side, we see the growth, the fast growth of verification -- private verification companies like a DoubleVerify, Integral Ad Science, comScore, et cetera. So I guess just looking ahead, if you believe in the brand opportunity and you want to lower the barriers to entry and raise the confidence of these advertisers in programmatic, would you ever see a need to build out or buy some of these verification and quality assessment tools? Hope this makes sense.

Timothy M. Armstrong

Yes, makes total sense. So I would just summarize at a high level and then I will give you a couple of details. First of all, AOL is actively involved in this space in terms of making sure the inventory is high quality. We're leading the committee, with the IAB and Randall Rothenberg, on really kind of trying to come up with standards and formats for making sure inventory and all of our products and all the industry's products are high quality. And the second thing is on the product side, there's a whole bunch of things that we can do on the product side and we are doing on the product side to essentially drain the non-quality inventory out of the systems. And the biggest thing we can do is actually give customers and publishers the ability to actually set their campaigns and inventory up in very transparent ways. So the more we make a product transparent about what you want to buy and when you want to buy it, where you want to buy it, how you want to buy it, that tends to be a great way for customers to essentially, themselves, help -- only go to the high-quality inventory overall. And in terms of verification, I think almost like the start of the Internet, 20 years ago, there were companies that did verification and those type of things. And I think overall at a marketplace level, that's a healthy thing. We're big investors in brand, big investors in quality technology platforms. So the more people that are either doing verification or the platforms get better at doing the verification themselves, which is what we're working on, we believe that's only going to help pricing and help customers transition things. And there's still, by the way, just to take a giant step back, a whole lot of impressions in the world that -- in the offline world, that don't get measured overall. So you can imagine, over a long period of time, the more the inventory gets better and the verification happens, the more pricing and ability for people to migrate become more and more attractive. So we're net bullish on this overall, and we're working really diligently to make sure the quality of impressions stays up and stays very high. And by the way, we're leading that in the industry with some of the other companies. So we're proactive about it. In terms of verification, companies themselves, you could call them and ask them what they want to do in the future. We tend to work with a whole bunch of different companies in that space, and we'll probably continue to do that.

Operator

Your next question comes from the line of Robert Peck representing SunTrust.

Robert Stephen Peck - SunTrust Robinson Humphrey, Inc., Research Division

I just wanted -- 2 quick questions. One, legging onto the last question there. So Tim, could you talk about -- there's been a lot of articles written on bot fraud. I know you're just touching on it, but could you talk a little bit about what the implications are to Adap.tv or AOL Networks going forward, if any? Will there be any sort of cleansing going forward? And then, Karen, for you, on the asset portfolio, how do you feel about the current portfolio of assets you have right now? And are there any particular assets that you think are maybe more non-core?

Timothy M. Armstrong

On the quality inventory areas, I think it's the same thing that -- again, without having super detailed knowledge, other than having spent 20 years at Internet companies, the same thing is true on the consumer side. I'm sure the same thing is true on the -- if you're a credit card company, making sure there's no fraud on your network. There's a lot of effort that goes into making sure that you have quality transactions and quality inventory. And again, we're very aggressively addressing this, both in the product side, about giving customers tremendous choice to make sure that how they set their campaigns up in the marketplace, they're able to avoid inventory they don't want. And then number two is being proactive on our own inventory and with the industry to make sure that those issues are addressed overall. And again, I think there's a well-worn path here of the industry and the companies, and AOL being one of them, really improving that over time. And it's something that we feel very strongly about, that we're a high-quality company investing in high-quality experiences, and we're going to continue to focus on that overall. And I think there was a question for Karen?

Karen E. Dykstra

Yes, the second part of the question was around how do I feel about the portfolio. So I would say I feel pretty good about the portfolio right now. We are continuing to work through each aspect, each segment individually and culling through core and really shifting resources to what we think matters the most. In brands, for example, we are scrubbing through the portfolio and putting more resources towards the most important brands that we're going to get the most bang for the buck. So we are going through that process of culling out some of the lesser-performing aspects of that portfolio, and we hope to continue to build that out, do more partnerships and so on and continue to focus on those areas, again, that count the most. In the networks portfolio, we are very happy with the assets in that portfolio, and I think you see us continuing to build out the technology and the products. And there's different aspects of the products that we need to invest in, more so than others, but I think we've culled through a lot of it. And we'll continue to look at maybe certain smaller investments or products to say, is this working or not and try to be nimble about that. But I'm really happy about the assets we have in the networks group. And then in membership, we have Mail, we have the subscription business and we are investing in Gathr, as we've talked about, to try to

kickstart some growth around the subscription model. We have strengthened the organization. It's -- one of our core competencies is to run that business, and we've done such a good job managing that, that we are investing to see if we can continue to build onto that. So I would say we're -- I'm happy with the portfolio. It doesn't mean that we don't go through all the time and cull out things that are not working and try to be nimble around pivoting where it makes sense.

Timothy M. Armstrong

Maybe just to close the call, first, is just to thank all the investors that remain with us in AOL, and we're going to continue to improve in 2014. I would summarize with a couple different things. One is change is an important attribute for us, and I'll quote Winston Churchill, "To improve is to change. To be perfect is to change often." One of our strategic weapons is changing as a company. We've stayed on strategy, but continue to change and update the business, and that's a big part of it. The second piece is that we are doing 2 things at AOL which are meaningful. And if you've read the book, A Thread Across The Ocean, putting the thread across the ocean, which was the telegraph cable, basically changed the way that piping worked with information, and we are investing in very big platforms and piping across our business and we're one of the few people in the world that can do that. The second piece is that we're putting services through that piping.

And just as you saw the changes that happened after the world got wired up, that platforms get bigger, brands get bigger, we believe that the coming increases in smartphone usage, those things are going to allow us to do bigger and bigger things on the pipe side and on the brand side as well. And the last thing is, in 2014, Karen and I, the rest of the management team, are incredibly focused on fewer, bigger things. And it'd be hard to underline that. But we are going to continue to make very difficult decisions at the business. We're going to continue to grow, and we're going to continue to basically make sure our shareholders get great returns during 2014. You have our personal and corporate commitment on that overall.

So thank you very much, and again, thanks to all the AOL employees for these results today. They really worked hard during Q3.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a great day.

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